How Much Can I Earn Before Paying Income Tax?

Whether you are a sole trader, an employee, a landlord or a limited company director, understanding how much you can earn before you start paying income tax is essential. This article explains the personal allowance, how UK income tax bands work in 2026/27 and the practical steps you can take to make the most of the allowances available to you.

• The personal allowance explained
• Income tax bands for 2026/27
• What counts as taxable income?
• Who gets the full personal allowance?
• How to reduce your taxable income legally
• How it works for sole traders vs employees
• How it works for limited company directors
• Making Tax Digital and reporting your income
• Frequently asked questions

The personal allowance explained

The personal allowance is the amount of income you can receive each tax year without paying any income tax on it. For 2026/27, the personal allowance is £12,570. This figure has been frozen since 2021/22 and is set to remain frozen until April 2028.

That means if your total taxable income is £12,570 or less in 2026/27, you will not pay a single penny of income tax. Once your income goes above that threshold, tax applies only to the portion above it, not to the full amount.

For example, if you earn £20,000 in 2026/27, you pay income tax only on £7,430 (the £20,000 minus your £12,570 personal allowance). You do not pay tax on the whole £20,000.

Income tax bands for 2026/27

Once your income exceeds the personal allowance, the rate of tax you pay depends on which band your income falls into. Here are the England, Wales and Northern Ireland income tax rates for 2026/27:

• Personal allowance: Up to £12,570, 0% tax
• Basic rate: £12,571 to £50,270, 20% tax
• Higher rate: £50,271 to £125,140, 40% tax
• Additional rate: Above £125,140, 45% tax

Scottish income tax rates differ. If you live in Scotland, Scottish Income Tax rates and bands apply to your earnings instead, and they include additional bands.

These are marginal rates. That means you only pay the higher rate on the slice of income that falls within that band, not on everything you earn. Someone earning £60,000 pays 20% on their income between £12,571 and £50,270, and 40% only on the £9,730 above that.

The personal allowance taper

If your income exceeds £100,000, your personal allowance is gradually withdrawn. You lose £1 of personal allowance for every £2 you earn above £100,000. By the time your income reaches £125,140, your personal allowance has been reduced to zero. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140: something that catches many higher earners off guard.

What counts as taxable income?

Not all money you receive is treated the same way by HMRC. It is worth knowing what counts towards your income for tax purposes.

Income that is taxable

• Employment income (salary, wages, bonuses, tips)
• Self-employment profits (after allowable business expenses)
• Rental income from property (after allowable deductions)
• Pension income (state pension and private pensions)
• Interest from savings (above your personal savings allowance)
• Dividends (above the £500 dividend allowance in 2026/27)
• Income from a trust

Income that is not taxable

• ISA interest and returns (up to the £20,000 annual ISA allowance)
• Premium Bond prizes
• Certain state benefits (such as Universal Credit and Child Benefit in most cases)
• Gifts and inheritances (though inheritance tax rules apply separately)
• The first £1,000 of trading income (the trading allowance)
• The first £1,000 of property income (the property allowance)

If you are a landlord, your taxable rental income is calculated after deducting allowable expenses such as letting agent fees, maintenance costs and mortgage interest relief, though the latter is now restricted to a 20% tax credit for most landlords.

Who gets the full personal allowance?

Most UK residents are entitled to the full £12,570 personal allowance for 2026/27, but there are some exceptions.

• High earners: Above £100,000, the taper described above applies.
• Non-UK residents: Entitlement depends on your residency status and any applicable tax treaty.
• Blind Person’s Allowance: If you are registered blind, you can claim Blind Person’s Allowance on top of the Personal Allowance.
• Marriage Allowance: If you or your spouse/civil partner earns below the personal allowance, the lower earner can transfer £1,260 of their unused allowance to the other, reducing the higher earner’s tax bill by up to £252.

How to reduce your taxable income legally

There are several legitimate ways to reduce the amount of income you pay tax on. These are not loopholes. They are reliefs built into the tax system for good reason.

Pension contributions

Money paid into a pension reduces your taxable income. The annual pension allowance for 2026/27 is £60,000 (or 100% of your earnings, whichever is lower). If you are a higher-rate taxpayer, pension contributions are one of the most tax-efficient things you can do. For every £80 you contribute, the government adds £20 in basic rate relief, and you can claim a further 20% back through self assessment if you pay higher-rate tax.

Gift Aid donations

Charitable donations made through Gift Aid also extend your basic rate band, which means higher-rate taxpayers can claim additional relief.

Salary sacrifice

Employees may be able to sacrifice part of their salary in exchange for employer pension contributions or other benefits. This reduces both the employee’s taxable income and their National Insurance contributions, and also reduces the employer’s National Insurance bill.

Allowable business expenses

If you are self-employed, you can deduct allowable business expenses from your turnover before arriving at your taxable profit. This includes costs such as office expenses, travel, tools, professional subscriptions and accountancy fees. Good bookkeeping throughout the year makes this far easier to get right.

ISAs

Income and gains within an ISA are completely free from income tax and capital gains tax. You can invest up to £20,000 per person per tax year in an ISA. This does not reduce your taxable income today but shelters future returns from tax.

How it works for sole traders vs employees

Employees

If you are employed, your personal allowance is applied automatically through the PAYE system. Your employer uses your tax code, typically 1257L for the standard personal allowance, to work out how much tax to deduct from each pay packet. You usually do not need to do anything unless your tax code is wrong or you have additional income to declare.

If you have more than one job, your personal allowance is normally applied to your main employment. Income from the second job is usually taxed in full from the first pound.

Sole traders and the self-employed

If you are self-employed, you declare your income and expenses through a self assessment tax return each year. HMRC uses your return to calculate how much income tax and Class 4 National Insurance you owe on your profits. Your personal allowance is applied as part of that calculation.

For 2026/27, sole traders pay income tax on profits above £12,570. They also pay Class 4 National Insurance at 6% on profits between £12,570 and £50,270, and 2% on profits above that. Class 2 National Insurance has not been compulsory since April 2024.

If you are a freelancer working across multiple clients, it is easy to lose track of your total income. Keeping your records up to date throughout the year means you will not face a nasty surprise when your tax bill arrives in January.

Since 6 April 2026, self-employed individuals and landlords with qualifying income over £50,000 have had to report their income quarterly under Making Tax Digital for Income Tax Self Assessment. This changes the way income is reported to HMRC, though the underlying tax rates and personal allowance remain the same.

How it works for limited company directors

Limited company directors have more flexibility over how they extract income from their business, and this directly affects how much income tax they pay.

Most directors choose to pay themselves a low salary, typically up to the personal allowance of £12,570 or the National Insurance secondary threshold of £5,000, and draw the rest of their income as dividends. Dividends are taxed at lower rates than salary:

• Dividend allowance: £500, 0% tax
• Basic rate dividends: 10.75%
• Higher rate dividends: 35.75%
• Additional rate dividends: 39.35%

The company pays corporation tax on its profits before dividends are paid out. The small profits rate is 19% on profits under £50,000. So the combined tax burden on a director’s income is often lower than it would be for a sole trader at the same level of earnings, though this depends heavily on profit levels and personal circumstances.

If you are a director, your salary is run through payroll, even if it is only a modest director’s salary. PAYE applies in the usual way, and your personal allowance is factored into your tax code.

Getting the split between salary and dividends right is one of the main reasons directors benefit from working with an accountant. The optimum structure depends on your other income, pension contributions and plans for the company.

Making Tax Digital and reporting your income

Since 6 April 2026, Making Tax Digital for Income Tax has covered anyone self-employed or letting property with qualifying income over £50,000. From April 2027, the threshold drops to £30,000, and from April 2028 to £20,000.

Under MTD ITSA, you will need to use compatible software to keep digital records and submit quarterly updates to HMRC, followed by a final end-of-year declaration. This replaces the annual self assessment tax return for those within scope.

The tax rates, personal allowance and income tax bands do not change under MTD, only the reporting method changes. But the shift to quarterly reporting does mean you need to know where you stand with your income throughout the year, rather than pulling everything together once a year in January.

If you get your records into accounting software now, or have our bookkeeping service keep them for you, you will be well placed ahead of the MTD deadline.

The personal allowance applies to everyone in the same way regardless of whether you report under the current self assessment system or the new MTD regime. You still will not pay income tax on the first £12,570 of taxable income in 2026/27.

A quick worked example

To make this concrete, here is how the 2026/27 tax year plays out for a sole trader with £45,000 of profit:

• Total profit: £45,000
• Less personal allowance: £12,570
• Taxable income: £32,430
• Income tax at 20%: £6,486
• Class 4 NI at 6% on £32,430: £1,945.80
• Approximate total tax and NI: £8,431.80

This does not account for pension contributions or other reliefs, which could reduce the tax figure significantly. Class 2 NI is no longer compulsory, so it is not included.

Wrapping up

The personal allowance of £12,570 for 2026/27 is your tax-free threshold. Understand what income counts towards it, check whether you are entitled to the full allowance and use the reliefs available to you (pensions, allowable expenses, ISAs) to keep your tax bill at a fair level. Whether you are employed, self-employed, a company director or a landlord, the rules apply to you in slightly different ways and getting them right makes a real difference to what you keep at the end of the year.

Frequently asked questions

How much can I earn before paying income tax in 2026/27?

In 2026/27, you can earn up to £12,570 before paying any income tax. This is the personal allowance, and it applies to most UK residents. If your total taxable income stays at or below this figure, you have no income tax to pay.

Does the personal allowance apply to all types of income?

Yes. The personal allowance applies to your total taxable income, including employment income, self-employment profits, rental income and pension income. It is your combined income across all sources that is measured against the £12,570 threshold.

What happens to my personal allowance if I earn over £100,000?

Above £100,000 you lose £1 of allowance for each £2 of income, so it reaches zero at £125,140. Once your income reaches £125,140, you have no personal allowance left. This creates an effective 60% marginal tax rate on income in that band. Making pension contributions is one of the most effective ways to bring your income back below £100,000 and restore some or all of your personal allowance.

Can I earn tax-free income on top of the personal allowance?

Yes. There are allowances on top of the personal allowance. In 2026/27, these include the £500 dividend allowance, the personal savings allowance (check HMRC guidance for current figures based on your tax band), the £1,000 trading allowance for self-employed individuals and the £1,000 property allowance for landlords. ISA income and gains are also entirely free from income tax.

Do I need to do a self assessment tax return if I earn under £12,570?

Not necessarily. If your only income is from employment and your PAYE tax code is correct, you generally do not need to file a tax return even if your income is below the personal allowance. However, if you are self-employed, a company director or have other untaxed income, you may still need to register for self assessment and file a return regardless of the amount you earn.

How does the personal allowance work if I have two jobs?

Your personal allowance is normally allocated to your main job through your tax code. Income from a second job is usually taxed from the first pound, often at the basic rate of 20%. If you think HMRC has split the allowance wrongly between your jobs, ask them to change your tax codes.